What you can learn from this site
If I had to distill my web site down to a concentrated form I would show two items. The two most important concepts you should understand after reading this web site are as follows. The first concept is easy to comprehend but unfortunately the second one requires a lengthy explanation.
1.. The way to save the most in interest costs on a mortgage is to shorten the amortization period. When you borrow money an interest clock starts ticking. The longer you wait to make a payment the larger the interest costs. In other words, pay back the mortgage ASAP to save the most in interest. The easiest way to do this is by making the largest accelerated blended weekly payment possible. All other options are less effective if you are seriously interested in MAXIMIZING your savings in interest costs.
2.. Lenders should be fairly compensated if borrowers pay off their mortgage before the term expires. In Canada the “penalty” to prematurely exit a mortgage term is an interest rate differential (IRD) calculation based upon your contractual term interest rate and current interest rates or a three month interest penalty whichever is greater. Usually IRD calculations are based upon going from a higher interest rate (the rate in your term contract) down to a lower interest rate (the prevailing term rates). Forget about the 3 month interest penalty for a moment. If you are exiting your mortgage and the time remaining on your term happens to be exactly 1,2,3,4 or 5 years the IRD calculation is straight forward and can be based upon the appropriate term rate prevailing. When the time remaining in your term is not an exact multiple of years, there is a perceived problem, but it is solvable!
Assume you have 2.5 years remaining in your five year term for your mortgage and you want to pay off your mortgage for whatever reason. There seems to be a dilemma as there is no interest rate for a 2.5 year term. Does the Bank use the 2 year term rate or the 3 year term rate to calculate the IRD from your existing contractual rate. Some lenders will use the current term rate that gives them the largest differential which results in the borrower paying a larger penalty. This is not fair to the borrower. The Federal government and the Canadian Bankers association have been aware of this problem since at least 1980 and nothing has been done.
Canadian Banks should agree upon a Canadian standard for determining a fair IRD calculation for this perceived problem. The solution is long overdue! This is an excellent mathematical challenge for the Canadian Banking Association and the Federal government.